The accompanying notes are an integral part of these consolidated financial statements.

	August 31,		February 28,
	2019		2019		May 31,		February 29,
	(unaudited)				2020		2020
Assets					(unaudited)
Current Assets
Cash and cash equivalents	$	5,753,209	$	5,384,027	$	7,440,923	$	4,822,071
Accounts receivable, less allowance for doubtful accounts of $585,306 and $489,502, respectively		4,017,572		3,993,262
Notes receivable, current portion		134,926		110,162
Accounts receivable, less allowance for doubtful accounts of $1,908,912 and $638,907, respectively						2,320,580		4,049,959
Notes receivable, current portion, less current portion of the valuation allowance of $50,814 and $0, respectively						110,624		160,700
Refundable income taxes		44,726		190,201		417,979		418,319
Inventories, less reserve for slow moving inventory of $178,658 and $371,147, respectively		4,195,198		4,270,357
Inventories						4,140,827		3,750,978
Other		465,876		318,126		397,311		409,703
Total current assets		14,611,507		14,266,135		14,828,244		13,611,730

Property and Equipment, Net		5,857,664		5,786,139		5,703,584		5,938,013

Other Assets
Notes receivable, less current portion		317,507		281,669
Notes receivable, less current portion and valuation allowance of $149,186 and $0, respectively						124,912		289,515
Goodwill, net		1,046,944		1,046,944		729,701		1,046,944
Franchise rights, net		3,363,304		3,678,920		2,915,707		3,047,688
Intangible assets, net		460,865		498,337		421,864		498,393
Deferred income taxes		505,462		607,421		1,809,407		630,078
Lease right of use asset		3,066,826		-		2,518,444		2,698,765
Other		56,264		56,576		56,263		56,262
Total other assets		8,817,172		6,169,867		8,576,298		8,267,645

Total Assets	$	29,286,343	$	26,222,141	$	29,108,126	$	27,817,388

Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long term debt	$	480,445	$	1,176,488	$	590,377	$	-
Line of credit						3,448,165		-
Accounts payable		1,295,732		897,074		2,965,103		2,241,506
Accrued salaries and wages		597,856		655,853		779,037		716,860
Gift card liabilities		648,142		742,289		605,437		609,842
Other accrued expenses		291,353		293,094		294,434		316,751
Dividend payable		719,359		714,939		-		722,344
Contract liabilities		239,278		256,094		193,492		195,658
Lease liability		808,989		-		803,106		803,861
Total current liabilities		5,081,154		4,735,831		9,679,151		5,606,822

Lease Liability, Less Current Portion		2,257,837		-		1,715,338		1,894,904
Long-Term Debt, Less Current Portion						948,047		-
Contract Liabilities, Less Current Portion		976,651		1,096,478		933,758		960,151

Commitments and Contingencies

Stockholders' Equity
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding		-		-		-		-
Series A Junior Participating Preferred Stock, authorized 50,000 shares		-		-
Undesignated series, authorized 200,000 shares		-		-
Common stock, $.001 par value, 46,000,000 shares authorized, 5,991,162 shares and 5,957,827 shares issued and outstanding, respectively		5,991		5,958
Series A Junior Participating Preferred Stock, 50,000 authorized; -0- shares issued and outstanding						-		-
Undesignated series, 200,000 shares authorized; -0- shares issued and outstanding						-		-
Common stock, $.001 par value, 46,000,000 shares authorized, 6,060,663 shares and 6,019,532 shares issued and outstanding, respectively						6,061		6,020
Additional paid-in capital		7,037,501		6,650,864		7,603,608		7,459,931
Retained earnings		13,927,209		13,733,010		8,222,163		11,889,560

Total stockholders' equity		20,970,701		20,389,832		15,831,832		19,355,511

Total Liabilities and Stockholders' Equity	$	29,286,343	$	26,222,141	$	29,108,126	$	27,817,388

The accompanying notes are an integral part of these consolidated financial statements.

	Six Months Ended							Three Months Ended
	August 31,							May 31,
	2019			2018				2020			2019
Cash Flows From Operating Activities
Net Income	$	1,629,697		$	1,327,759
Net (loss) income								$	(3,667,397	)	$	711,609
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		750,486			872,454				343,115			377,654
Provision for obsolete inventory		47,945			57,614
Provision for loss on accounts and notes receivable		108,283			40,800				1,468,815			81,283
Asset impairment and store closure losses		-			67,822				544,060			-
Loss on sale or disposal of property and equipment		5,796			26,020				4,956			2,867
Expense recorded for stock compensation		386,670			280,728				143,718			231,254
Deferred income taxes		101,959			38,814				(1,179,329	)		38,028
Changes in operating assets and liabilities:
Accounts receivable		(267,491	)		421,162				476,533			(100,089	)
Refundable income taxes		145,475			257,685				340			185,667
Inventories		212,138			(1,579,686	)			(433,932	)		367,824
Contract Liabilities									(27,515	)		(90,248	)
Other current assets		(147,750	)		(154,537	)			12,393			(122,047	)
Accounts payable		213,734			58,005				680,748			115,667
Accrued liabilities		(153,885	)		(254,540	)			35,453			28,640
Contract liabilities		(130,378	)		(71,671	)
Net cash provided by operating activities		2,902,679			1,388,429
Net cash (used in) provided by operating activities									(1,598,042	)		1,828,109

Cash Flows from Investing Activities
Proceeds received on notes receivable		74,296			55,612				17,825			28,400
Purchase of intangible assets									(41,464	)		-
Purchases of property and equipment		(480,984	)		(242,432	)			(22,488	)		(283,548	)
(Increase) decrease in other assets		312			(13,717	)
Decrease in other assets									-			312
Net cash used in investing activities		(406,376	)		(200,537	)			(46,127	)		(254,836	)

Cash Flows from Financing Activities
Payments on long-term debt		(696,043	)		(670,336	)			-			(346,547	)
Proceeds from long-term debt									1,537,200			-
Proceeds from the line of credit									3,448,165			-
Dividends paid		(1,431,078	)		(1,417,305	)			(722,344	)		(715,179	)
Net cash used in financing activities		(2,127,121	)		(2,087,641	)
Net cash provided by (used in) financing activities									4,263,021			(1,061,726	)

Net Increase (Decrease) in Cash and Cash Equivalents		369,182			(899,749	)
Net Increase in Cash and Cash Equivalents									2,618,852			511,547

Cash and Cash Equivalents, Beginning of Period		5,384,027			6,072,984				4,822,071			5,384,027

Cash and Cash Equivalents, End of Period	$	5,753,209		$	5,173,235			$	7,440,923		$	5,895,574

The accompanying notes are an integral part of these consolidated financial statements.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

The Company's policy for recognizing initial franchise and renewal fees through February 28, 2018 was to recognize initial franchise fees upon new store openings and renewals.In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning March 1, 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally 10-15 years.

The following table summarizes contract liabilities as of May 31, 2020 and May 31, 2019:

On May 31, 2020, annual revenue expected to be recognized in the future, related to performance obligations that are not yet fully satisfied, are estimated to be the following:

The Company’s franchisees sell gift cards which do not have either expiration dates, or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. The Company has historically accumulated gift card liabilities and has not recognized breakage associated with the gift card liability. The adoption of ASC 606 requires the use of the “proportionate” method for recognizing breakage, which the Company has not historically utilized. Upon adoption of ASC 606 the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Under the Company’s 2007 Equity Incentive Plan (as amended and restated) (the “2007 Plan”), the Company may authorize and grant stock awards to employees, non-employee directors and certain other eligible participants, including stock options, restricted stock and restricted stock units.

The Company recognized $143,718 of stock-based compensation expense during the three months ended May 31, 2020 compared with $231,254 during the three months ended May 31, 2019. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.

The following table summarizes non-vested restricted stock unit transactions for common stock during the three months ended May 31, 2020 and 2019:

The Company did not issue any unrestricted shares of stock to non-employee directors during the three months ended May 31, 2020 compared to 4,500 shares issued during the three months ended May 31, 2019. In connection with these non-employee director stock issuances, the Company recognized $0 and $42,525 of stock-based compensation expense during the three months ended May 31, 2020 and 2019, respectively.

During the three months ended May 31, 2020, the Company recognized $143,718 of stock-based compensation expense related to non-vested, non-forfeited restricted stock unit grants compared to $188,729 during the three months ended May 31, 2019. The restricted stock units generally vest in equal annual installments over a period of five to six years. Total unrecognized stock-based compensation expense of non-vested, non-forfeited restricted stock units, as of May 31, 2020, was $1,994,662, which is expected to be recognized over the weighted average period of 4.33 years.

During the three months ended May 31, 2019, the Company granted 270,000 shares of restricted stock units with a grant date fair value of $2,536,100 or $9.39 per share, compared with no restricted stock units awarded in the three months ended May 31, 2020. The restricted stock unit grants vest in equal annual installments over a period of five to six years.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements involve various risks and uncertainties. The nature of our operations and the environment in which we operate subject us to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact, included in this Quarterly ~~Report~~Report are forward-looking statements. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect," "anticipate," "should," "plan," "estimate," "potential," or similar expressions. Factors which could cause results to differ include, but are not limited to: the ~~outcome~~impact of the novel coronavirus (COVID-19) on our business, including, among other things, online sales, factory sales, retail sales and royalty and marketing fees, our liquidity, our ~~ongoing evaluation~~cost cutting and capital preservation measures,achievement of the anticipated potential benefits of the strategic ~~alternatives, including, but not limited~~alliance with Edible (as defined herein), our ability to provide products to Edible under the ~~time table for identifying potential transactions or transaction candidates and whether any transaction will be completed, relationships and changes in our customers,~~strategic alliance,theability to increase our online sales throught the agreements with Edible, changes in the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding strategy, the success of international expansion efforts and the effect of government regulations. Government regulations which we and our franchisees and licensees either are, or may be, subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, licensing, employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see the section entitled “Risk Factors” contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 289, ~~201~~20920. Additional factors that might cause such differences include, but are not limited to: the length and severity of the current COVID-19 pandemic and its effect on among other things, factory sales, retail sales, royalty and marketing fees and operations, the effect of any governmental action or mandated employer-paid benefits in response to the COVID-19 pandemic, our ability to manage costs and reduce expenditures in the current economic environment and the availability of additional financing if and when required. These forward-looking statements apply only as of the date of this Quarterly ~~Report.~~Report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, we undertake no obligation to release publicly any revisions to these forward-looking statements that might reflect events or circumstances occurring after the date of this Quarterly ~~Report~~Report or those that might reflect the occurrence of unanticipated events.

Unless otherwise specified, the “Company,” “we,” “us” or “our” refers to Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its consolidated subsidiaries(including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”)).

We are an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our wholly-owned subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates soft-serve frozen yogurt cafés. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectionary products. We also sell our candy in select locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of ~~August~~May 31, ~~2019,~~2020, there were two Company-owned, 9598 licensee-owned and ~~242~~232 franchised Rocky Mountain Chocolate Factory stores operating in 37 states, Canada, South Korea, the republic of Panama, and the Philippines. As of ~~August~~May 31, ~~2019,~~2020, U-Swirl operated ~~four~~three Company-owned cafés and 9283 franchised cafés located in 2425 states and Qatar. U-Swirl operates self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!” and “Aspen Leaf Yogurt”.

On December 20, 2019, the Company entered into a strategic alliance (the “Strategic Alliance”) with Edible Arrangements, LLC (“EA”) and Farids & Co. LLC (“Farids,” and together with EA and any permitted transferees, “Edible”), pursuant to which, among other things, the Company will become the exclusive provider of certain branded chocolate products to Edible, its affiliates and its franchisees. In connection with the Strategic Alliance, the Company entered into a strategic alliance agreement, an exclusive supplier operating agreement and a warrant agreement with Edible. In addition, on March 7, 2020, the Company entered into an ecommerce licensing agreement with Edible, whereby Edible sells a wide variety of chocolates, candies and other confectionery products produced by the Company or its franchisees through Edible’s websites.

In June 2019, the Company’s largest customer, FTD Companies, Inc. and its domestic subsidiaries (“FTD”), filed for Chapter 11 bankruptcy proceedings. As a part of such bankruptcy proceedings, divisions of FTD’s business and certain related assets, including the divisions that the Company has historically sold product to, were sold through the auction to multiple buyers. The Company is uncertain if accounts receivable and inventory balances associated with FTD at ~~August~~May 31, ~~2019~~2020 will be realized at their full value, or if any revenue will be received from FTD in the future. See Note 13 to the financial statements contained herein for additional information about the FTD bankruptcy.

In addition, as previously announced on May 11, 2020, the Board of Directors decided to suspend the Company’s first quarter cash dividend payment to preserve cash and provide additional flexibility in the current environment impacted by the COVID-19 pandemic. Furthermore, the Board of Directors has suspended future quarterly dividends until the significant uncertainty of the current public health crisis and economic climate has passed, and the Board of Directors determines that resumption of dividend payments is in the best interest of us and our stockholders.

During this challenging time, the Company’s foremost priority is the safety and well-being of our employees, customers, franchisees and communities. In addition to the already stringent practices for the quality and safety of the Company’s confections, the Company is diligently following health and safety guidance issued by the World Health Organization, the Centers for Disease Control and state and local governmental agencies. COVID-19 has had an unprecedented impact on the retail industry as containment measures continue to impact the Company’s operations and the retail industry. Numerous countries, states and local governments have effected ordinances to protect the public through social distancing, which has caused, and we expect will continue to cause, a significant decrease in, among other things, retail traffic and as a result, factory sales, retail sales and royalty and marketing fees. With that said, Rocky Mountain Chocolate Factory products remain available for sale online. The Company’s current focus is on supporting its franchisees and licensees during this challenging time and driving growth in online sales, especially in light of the ecommerce licensing agreement with Edible, as discussed below, while also sensibly managing costs. The number of Company-owned and franchise stores remaining open may change frequently and significantly due to the ever-changing nature of the COVID-19 outbreak.

In these challenging and unprecedented times, management is taking all necessary and appropriate action to maximize liquidity as the Company navigates the current landscape. These actions include significantly reducing operating expenses and production volume to reflect reduced sales volumes as well as the elimination of all non-essential spending and capital expenditures. Further, in an abundance of caution and to maintain ample financial flexibility, the Company drew down the full amount under our line of credit and the Company received a loan under the Paycheck Protection Program (the “PPP”). The receipt of funds under the PPP has allowed the Company to temporarily avoid workforce reduction measures amidst a steep decline in revenue and production volume. While the Company believes it has sufficient liquidity with its current cash position, the Company will continue to monitor and evaluate all financing alternatives as necessary as these unprecedented events evolve. For more information, please see Item 1A “Risk Factors—The Novel Coronavirus (COVID-19) Pandemic Has, and May Continue to, Materially and Adversely Affect our Sales, Earnings, Financial Condition and Liquidity” in our Annual Report on Form 10-K as filed on May 29, 2020 with the United States Securities and Exchange Commission.

Three Months Ended ~~August~~May 31, ~~201~~20920 Compared to the Three Months Ended ~~August~~May 31, 20189

Basic earnings per share ~~increased 15.4%~~decreased from ~~$0.13 in~~$0.12 per share for the three months ended ~~August~~May 31, ~~2018~~2019 to ~~$0.15 in~~a net loss of $(0.61) per share for the three months ended ~~August~~May 31, ~~2019.~~2020. Revenues decreased ~~(5.3)%~~67.9% from ~~$7.8~~$8.43 million infor the three months ended ~~August~~May 31, ~~2018~~2019 to ~~$7.4~~$2.70 million infor the three months ended ~~August~~May 31, ~~2019.~~2020. Operating income ~~increased 19.7%~~decreased from ~~$1.0 million in~~$946,000 for the three months ended ~~August~~May 31, ~~2018~~2019 to ~~$1.2~~an operating loss of $(4.83) million infor the three months ended ~~August~~May 31, ~~2019.~~2020. Net income ~~increased 22.3%~~decreased from ~~$751,000 in~~$712,000 for the three months ended ~~August~~May 31, ~~2018~~2019 to ~~$918,000 in~~a net loss of $(3.67) million for the three months ended ~~August~~May 31, ~~2019.~~2020. The ~~increase~~decrease in revenue, operating income and net income was due primarily to ~~lower operating expenses in~~ the ~~three months ended August 31, 2019 compared to~~impacts from the ~~three months ended August 31, 2018.~~

~~Revenues~~COVID-19 pandemic, including its impact on our operation and the operations of our franchised, licensed and Company-owned locations.

The decrease in factory sales for the three months ended ~~August~~May 31, ~~2019 versus~~2020 compared to the three months ended ~~August~~May 31, ~~2018~~2019 was primarily due to a ~~32.4%~~73.6% decrease in sales of product to our network of franchised and licensed retail stores and a 30.5% decrease in shipments of product to customers outside our network of ~~franchise and licensed~~franchised retail ~~locations and a 2.7% decrease in purchases by our network of franchised and licensed~~ stores. The decrease in shipments of product to customers outside our network of franchise and licensed retail stores was primarily the result of product rationalization and a decline in revenue associated with products no longer offered for sale. Purchases by the Company’s largest customer ~~FTD, decreased~~ during the three months ended ~~August~~May 31, ~~2019, with revenue from such customer decreasing~~2020 were approximately $144,000, or 5.3% of the Company’s revenues, compared to ~~approximately $103,000,~~$1.4 million, or ~~1.4%,~~16.3% of the Company’s revenues during the three months ended ~~August~~May 31, 2019 ~~compared to $144,000, or 1.8% of the Company’s revenues during the three months ended August 31, 2018.~~for this same customer. As discussed above, FTD declared Chapter 11 bankruptcy in June 2019. Until the bankruptcy proceedings are complete, it is unclear whether the Company will realize any revenue from FTD in the future, and if so, whether such revenues will return to historic levels.

~~Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise~~ The decrease in sales of product to our network of franchised and ~~license locations decreased 5.0%~~licensed retail stores was primarily the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended ~~August~~May 31, ~~2019, compared~~2020, which significantly reduced traffic in our stores. These decreases were partially offset by increases in factory sales associated with ~~the three months ended August 31, 2018.~~ our strategic alliance with Edibile and by an increase in revenue from online sales of our products directly to consumers. Beginning in May 2020 most stores previously closed for much of March 2020 and April 2020, in response to COVID-19, began to re-open. Most stores re-opened subject to various local health restrictions and reduced operations. It is unclear when or if store operations will return to pre COVID-19 levels.

~~The decrease in retail~~Retail sales at Company-owned stores decreased for the three months ended ~~August~~May 31, ~~2019~~2020 compared to the three months ended ~~August~~May 31, ~~2018 was primarily due to fewer Company-owned units in operation because~~2019 as a result of the closure of ~~certain underperforming Company-owned locations during the prior fiscal year. Same store sales at~~ all of our Company-owned stores ~~and cafés decreased 1.7% in~~for much of the three months ended ~~August~~May 31, ~~2019 compared to~~2020. The closure of our Company-owned stores was the result of the COVID-19 pandemic and the associated public health measures in place during the three months ended ~~August~~May 31, ~~2018.~~2020. As of May 31, 2020 all but one Company-owned store had resumed limited operations following COVID-19 related closure.

The decrease in ~~royalties~~royalty and marketing fees ~~from~~for the three months ended ~~August~~May 31, ~~2018~~2020 compared to the three months ended ~~August~~May 31, 2019 was primarily due to ~~a 6.5% decrease~~the COVID-19 pandemic and the associated public health measures in ~~domestic franchise units in operation. The average number of total domestic franchise stores in operation decreased from 291 in the three months ended August 31, 2018 to 272~~place during the three months ended ~~August~~May 31, ~~2019. This decrease is the result~~2020. Nearly all of ~~domestic store closures exceeding domestic store openings. Same store sales at total franchise stores~~our franchised locations experienced reduced operations and ~~cafés in operation increased 0.1%~~periods of full closure during the three months ended ~~August~~May 31, ~~2019~~2020.

The decrease in franchise fees for the three months ended May 31, 2020 compared to the three months ended ~~August~~May 31, ~~2018.~~

~~The decrease in franchise fee revenue for the three months ended August 31,~~ 2019 ~~compared to the three months ended August 31, 2018~~ was the result of a decrease in revenue resulting from ~~fewer franchise stores in operation~~store closures and the termination of any future contract liability associated ~~recognition of revenue over~~with the ~~term of the franchise agreement.~~closure.

Three Months Ended

August 31,

May 31,

(

Table of Contents

Gross Margin

Three Months Ended

August 31,

May 31,

(

	Three Months Ended												Three Months Ended
	August 31,						%			%			May 31,						%			%
	2019			2018			Change			Change			2020			2019			Change			Change
(Percent)
Factory gross margin		23.4	%		25.2	%		(1.9	)%		(7.4	)%		-30.7	%		22.8	%		(53.5	)%		(234.6	)%
Retail gross margin		66.4	%		67.7	%		(1.3	)%		(1.9	)%		50.6	%		66.3	%		(15.7	)%		(23.7	)%
Total		30.6	%		32.3	%		(1.7	)%		(5.4	)%		-24.2	%		28.6	%		(52.8	)%		(184.6	)%

Adjusted Gross Margin

Three Months Ended

August 31,

May 31,

(

Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.

~~Table of Contents~~

~~Cost of Sales~~ ~~and Gross Margin~~

Factory margins decreased 190 basis points in the three months ended August 31, 2019 compared to the three months ended August 31, 2018 because of a charge associated with costs of excess capacity. Excess capacity was the result of a 14.8% decrease in production for the three months ended August 31, 2019 compared to the three months ended August 31, 2018. The decrease in Company-owned store margin is due primarily to a change in units in operation during the three months ended August 31, 2019 compared to the prior year.

~~Franchise Costs~~

The decrease in franchise costs in the three months ended August 31, 2019 versus the three months ended August 31, 2018 is due primarily to a decrease in legal and professional expense in the three months ended August 31, 2019 compared to the three months ended August 31, 2018. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs decreased to 22.1% in the three months ended August 31, 2019 from 28.2% in the three months ended August 31, 2018.

~~Sales and Marketing~~

The decrease in sales and marketing costs for the three months ended August 31, 2019 compared to the three months ended August 31, 2018 is primarily due to planned cost reductions as a result of fewer domestic franchise units in operation and lower revenue associated with sales to customers outside of our network of franchised and licensed RMCF locations.

~~General and Administrative~~

The increase in general and administrative costs for the three months ended August 31, 2019 compared to the three months ended August 31, 2018 is primarily due to higher professional fees associated with the Company’s previously announced process to explore and review strategic alternatives to maximize shareholder value and position the Company for long-term success. During the three months ended August 31, 2019, the Company incurred approximately $92,000 of costs associated with the review of strategic alternatives, compared with no comparable costs incurred in the three months ended August 31, 2018. As a percentage of total revenues, general and administrative expenses increased to 11.2% in the three months ended August 31, 2019 compared to 10.4% in the three months ended August 31, 2018.

~~Retail Operating Expenses~~

The decrease in retail operating expenses for the three months ended August 31, 2019 compared to the three months ended August 31, 2018 was due primarily to changes in units in operation as a result of the closure of certain underperforming Company-owned units. Retail operating expenses, as a percentage of retail sales, decreased from 52.3% in the three months ended August 31, 2018 to 52.0% in the three months ended August 31, 2019. This decrease is primarily the result of the change in units in operation from the prior year.

~~Depreciation and Amortization~~

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $225,000 in the three months ended August 31, 2019, a decrease of 24.0% from $297,000 in the three months ended August 31, 2018. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 8 to the financial statements for a summary of annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 6.7% from $138,000 in the three months ended August 31, 2018 to $147,000 in the three months ended August 31, 2019. This increase was the result of an increase in production assets in service primarily resulting from the replacement of obsolete equipment or equipment at the end of its operating life.

~~Costs Associated with Company-Owned Store Closures~~

There was $119,000 in costs associated with Company-owned store closures incurred during the three months ended August 31, 2018 and no costs associated with company-owned store closures incurred during the three months ended August 31, 2019. The costs incurred during the three months ended August 31, 2018 were the result of charges related to closing certain underperforming Company-owned locations.

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~~Other Income~~ ~~(Expense)~~

Net interest income was $3,000 in the three months ended August 31, 2019 compared to net interest expense of $15,000 incurred in the three months ended August 31, 2018. This decrease in interest expense is due to lower average outstanding promissory note balances for the three months ended August 31, 2019 compared to the three months ended August 31, 2018.

~~Income Tax Expense~~

~~Our effective income tax rate for the three months ended August 31, 2019 was 26.4%, compared to 26.8% for the three months ended August 31, 2018.~~

~~Six Months Ended August 31, 2019 Compared to the Six Months Ended August 31, 2018~~

~~Results Summary~~

Basic earnings per share increased 22.7% to $0.27 for the six months ended August 31, 2019 compared to $0.22 for the six months ended August 31, 2018. Revenues decreased (2.2)% to $15.8 million for the six months ended August 31, 2019 compared to $16.2 million in the six months ended August 31, 2018. Operating income increased 20.2% from $1.8 million in the six months ended August 31, 2018 to $2.2 million in the six months ended August 31, 2019. Net income increased 22.7% from $1.3 million in the six months ended August 31, 2018 to $1.6 million in the six months ended August 31, 2019. The increase in operating income and net income was due primarily to lower operating expenses in the six months ended August 31, 2019 compared to the six months ended August 31, 2018.

~~Revenues~~

Six Months Ended

August 31,
$
%

($'s in thousands)

2019

2018

Change

Change

Factory sales
$ 10,088.4 $ 10,341.3 $ (252.9 ) (2.4 )%
Retail sales
1,756.3 1,977.1 (220.8 ) (11.2 )%
Franchise fees
188.2 200.7 (12.5 ) (6.2 )%
Royalty and marketing fees
3,778.4 3,647.1 131.3 3.6 %
Total
$ 15,811.3 $ 16,166.2 $ (354.9 ) (2.2 )%

~~Factory Sales~~

The decrease in factory sales for the six months ended August 31, 2019 versus the six months ended August 31, 2018 was primarily due to a 10.2% decrease in shipments of product to customers outside our network of franchise and licensed retail locations. The decrease in shipments of product to customers outside our network of franchise and licensed retail stores was primarily the result of product rationalization and a decline in revenue associated with products no longer offered for sale. Purchases by the Company’s largest customer, FTD, were approximately $1.5 million, or 9.3%, of the Company’s revenues during the six months ended August 31, 2019, compared to $1.4 million, or 8.8% of the Company’s revenues during the six months ended August 31, 2018. As discussed above, FTD declared Chapter 11 bankruptcy in June 2019. Until the bankruptcy proceedings are complete, it is unclear whether the Company will realize any revenue from FTD in the future, and if so, whether such revenues will return to historic levels.

Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 5.3% in the six months ended August 31, 2019, compared with the six months ended August 31, 2018.

~~Retail Sales~~

The decrease in retail sales for the six months ended August 31, 2019 compared to the six months ended August 31, 2018 was primarily due to fewer Company-owned units in operation because of the closure of certain underperforming Company-owned locations during the prior fiscal year. Same store sales at all Company-owned stores and cafés increased 0.2% in the six months ended August 31, 2019 compared to the six months ended August 31, 2018.

~~Royalties, Marketing Fees and Franchise Fees~~

The increase in royalties and marketing fees from the six months ended August 31, 2018 to the six months ended August 31, 2019 was primarily due to an increase in royalty revenue associated with the Company’s purchase-based royalty structure, partially offset by a 6.5% decrease in domestic franchise units in operation. The average number of total domestic franchise stores in operation decreased from 293 in the six months ended August 31, 2018 to 274 during the six months ended August 31, 2019. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at total franchise stores and cafés in operation increased 0.5% during the six months ended August 31, 2019 compared to the six months ended August 31, 2018.

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The decrease in franchise fee revenue for the six months ended August 31, 2019 compared to the six months ended August 31, 2018 was the result of a decrease in revenue resulting from fewer franchise stores in operation and the associated recognition of revenue over the term of the franchise agreement.

~~Costs and Expenses~~

~~Cost of Sales~~

Six Months Ended

August 31,
$
%

($'s in thousands)

2019

2018

Change

Change

Cost of sales - factory
$ 7,761.8 $ 7,846.1 $ (84.3 ) (1.1 )%
Cost of sales - retail
591.3 703.0 (111.7 ) (15.9 )%
Franchise costs
924.7 1,076.0 (151.3 ) (14.1 )%
Sales and marketing
991.4 1,153.5 (162.1 ) (14.1 )%
General and administrative
1,975.2 1,727.8 247.4 14.3 %
Retail operating
918.2 1,061.3 (143.1 ) (13.5 )%
Total
$ 13,162.6 $ 13,567.7 $ (405.1 ) (3.0 )%

~~Gross Margin~~

Six Months Ended

August 31,
$
%

2019

2018

Change

Change

Factory gross margin
$ 2,326.6 $ 2,495.2 $ (168.6 ) (6.8 )%
Retail gross margin
1,165.0 1,274.1 (109.1 ) (8.6 )%
Total
$ 3,491.6 $ 3,769.3 $ (277.7 ) (7.4 )%

Six Months Ended

August 31,

%

%

2019

2018

Change

Change

Factory gross margin
23.1 % 24.1 % (1.1 )% (4.4 )%
Retail gross margin
66.3 % 64.4 % 1.9 % 2.9 %
Total
29.5 % 30.6 % (1.1 )% (3.7 )%

~~Adjusted Gross Margin~~

Six Months Ended

August 31,
$
%

($'s in thousands)

2019

2018

Change

Change

Factory gross margin
$ 2,326.6 $ 2,495.2 $ (168.6 ) (6.8 )%
Plus: depreciation and amortization
293.1 274.7 18.4 6.7 %
Factory adjusted gross margin
2,619.7 2,769.9 (150.2 ) (5.4 )%
Retail gross margin
1,165.0 1,274.1 (109.1 ) (8.6 )%
Total Adjusted Gross Margin
$ 3,784.7 $ 4,044.0 $ (259.3 ) (6.4 )%

Factory adjusted gross margin
26.0 % 26.8 % (0.8 )% (3.1 )%
Retail gross margin
66.3 % 64.4 % 1.9 % 2.9 %
Total Adjusted Gross Margin
32.0 % 32.8 % (0.9 )% (2.7 )%

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Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider itthem in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.

Cost of Salesand Gross Margin

Factory gross margins decreased ~~110 basis points~~to negative gross margin of (23.4)% in the ~~six~~three months ended ~~August~~May 31, 2020 compared to positive gross margin of 25.4% during the three months ended May 31, 2019, due primarily to lower production volume in the three months ended May 31, 2020 compared to the ~~six~~three months ended ~~August~~May 31, ~~2018 because~~2019. During the three monthd ended May 31, 2020, production volume decreased 56.7% in response to a 61.9% decrease in factory sales, primarily due to the impacts of the COVID-19 pandemic. As a ~~charge associated with costs of excess capacity partially offset by certain cost reductions. Excess capacity was the~~ result of ~~a 10.6%~~the decrease in production ~~for~~volume, factory fixed costs, including idle labor, exceeded revenue during the ~~six~~three months ended ~~August~~May 31, 2020. During the three months ended May 31, 2020 the Company incurred approximately $280,000 of production labor costs associated with paying employees who abided by local stay at home orders related to COVID-19 public health measures. This excess capacity cost, in the form of idle labor, was included in cost of sales.

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Retail gross margins decreased from 66.3% during the three months ended May 31, 2019 ~~compared~~ to 50.6% during the ~~six~~three months ended ~~August~~May 31, ~~2018.~~2020. The ~~increase~~decrease in retail gross margins was primarily the result of the temporary closure of ~~underperforming~~all of our Company-owned ~~locations during~~stores for much of the ~~prior fiscal year.~~three months ended May 31, 2020 due to the COVID-19 pandemic, and the associated impact on perishable inventory.

Franchise Costs

The decrease in franchise costs in the ~~six~~three months ended ~~August~~May 31, 2020 compared to the three months ended May 31, 2019 ~~versus the six months ended August 31, 2018 is~~was due primarily to ~~a decrease in legal and professional expenses.~~lower travel costs, the result of COVID-19 related travel restrictions. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs ~~decreased~~increased to ~~23.3%~~90.3% in the ~~six~~three months ended ~~August~~May 31, ~~2019~~2020 from ~~28.0%~~24.6% in the ~~six~~three months ended ~~August~~May 31, ~~2018.~~2019. This ~~decrease~~increase as a percentage of royalty, marketing and franchise fees is primarily a result of lower ~~franchise costs.~~royalty revenues.

Sales and Marketing

The decrease in sales and marketing costs for the ~~six~~three months ended ~~August~~May 31, ~~2019~~2020 compared to the ~~six~~three months ended ~~August~~May 31, ~~2018 is~~2019 was primarily due to ~~planned cost reductions as a result of fewer domestic franchise units~~lower advertising and promotion costs, partially offset by an increase in ~~operation.~~online advertising cost.

General and Administrative

The increase in general and administrative costs for the ~~six~~three months ended ~~August~~May 31, ~~2019~~2020 compared to the ~~six~~three months ended ~~August~~May 31, ~~2018 is~~2019 was due primarily ~~due~~ to an increase in bad debt expense, the impairment of certain intangible assets and higher professional fees associated with the Company’s previously announced process to explore and review strategic alternatives to maximize shareholder value and position the Company for long-term success. During the six months ended August 31, 2019, the Company incurred approximately $347,000 of costs associated with the review of strategic alternatives, compared with no comparable costs incurred in the six months ended August 31, 2018.fees. As a percentage of total revenues, general and administrative expenses increased to ~~12.5%~~117.7% in the ~~six~~three months ended ~~August~~May 31, ~~2019~~2020 compared to ~~10.7%~~13.6% in the ~~six~~three months ended ~~August~~May 31, ~~2018.~~2019. Bad debt expense was primarily the result of management’s assessment of the likelihood of collecting accounts and notes receivable as of May 31, 2020. As a result of this assessment total allowances for potentially uncollectable accounts and notes receivable increased to $2,108,912 at May 31, 2020, compared to $557,916 at February 29, 2020. This cost was a direct result of public health measures in place due to responses to COVID-19 and the financial burden experienced by the majority of our network of franchised and licensed locations. See Note 8 to the financial statements for a summary of costs associated with the impairment of certain intangible assets.

Retail Operating Expenses

The decrease in retail operating expenses for the ~~six~~three months ended ~~August~~May 31, ~~2019~~2020 compared to the ~~six~~three months ended ~~August~~May 31, ~~2018~~2019 was due ~~primarily~~ to ~~changes in units in operation, as a result~~the temporary closure of all of our Company-owned stores for much of the three months ended May 31, 2020. The closure of ~~certain underperforming~~our Company-owned units. Retail operating expenses, as a percentage of retail sales, decreased from 53.7% in the six months ended August 31, 2018 to 52.3% in the six months ended August 31, 2019. This decrease is primarilystores was the result of COVID-19 and the ~~change~~associated public health measures in ~~units in operation from~~place during the ~~prior year.~~three months ended May 31, 2020.

Depreciation and Amortization

Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was ~~$457,000~~$186,000 in the ~~six~~three months ended ~~August~~May 31, ~~2019,~~2020, a decrease of ~~23.5%~~20.0% from ~~$598,000~~$232,000 incurred in the ~~six~~three months ended ~~August~~May 31, ~~2018.~~2019. This decrease was ~~the result of lower amortization of franchise rights,~~ the result of a decrease in frozen yogurt cafés in ~~operation.~~operation and lower amortization of the associated franchise rights. See Note 87 to the financial statements for a summary of annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased ~~6.7%~~8.1% from ~~$275,000~~$145,700 in the ~~six~~three months ended ~~August~~May 31, ~~2018~~2019 to ~~$293,000~~$157,500 in the ~~six~~three months ended ~~August~~May 31, ~~2019.~~2020. This increase was the result of an increase in production assets in ~~service primarily resulting from the replacement of obsolete equipment or equipment at the end of its operating life.~~service.

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~~Costs Associated with Company-Owned Store Closures~~

There was $177,000 in costs associated with Company-owned store closures incurred during the six months ended August 31, 2018 and no costs associated with Company-owned store closures incurred during the six months ended August 31, 2019. The costs incurred during the six months ended August 31, 2018 were the result of charges related to closing certain underperforming Company-owned locations.

Other Income (Expense)

~~Interest income was approximately equal to~~Net interest expense was $17,800 in the ~~six~~three months ended ~~August~~May 31, ~~2019,~~2020 compared to net interest expense of ~~$33,000 in~~$2,200 during the ~~six~~three months ended ~~August~~May 31, ~~2018.~~2019. This ~~decrease in interest expense is due to lower average outstanding promissory note balances for~~change was primarily the ~~six~~result of the Company’s increased debt as a result of measures taken during the three months ended ~~August~~May 31, ~~2019.~~2020 to ensure adequate liquidity during the COVID-19 pandemic. During the three months ended May 31, 2020, the Company borrowed $3.4 million from its line of credit and borrowed $1.5 million of loans under the Paychecks Protection Program.

Income Tax Expense

Our effective income tax rate was 24.3% for the ~~six~~three months ended ~~August~~May 31, ~~2019~~2020 and was ~~25.6%, compared to 25.9%~~24.6% for the ~~six~~three months ended ~~August~~May 31, ~~2018.~~ 2019.

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Liquidity and Capital Resources

As discussed below, we have taken several defensive measures to maximize liquidity in response to the COVID-19 pandemic, including the suspension of ~~August~~our cash dividend, reducing expenses, extending payment terms with vendors, reducing production volume and deferring discretionary capital expenditures. Based on these actions, we believe that cash flows from operations and our cash and cash equivalents on hand, will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months. Additional future financing may be necessary to fund our operations, and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all, especially in light of the market volatility and uncertainty as a result of the COVID-19 pandemic. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity.

As of May 31, ~~2019 and February 28, 2019,~~2020, working capital was ~~$9.5~~$5.1 million, compared to $8.0 million as of February 29, 2020, a decrease of $2.9 million. The decrease in working capital was primarily due to an increase in current liabilities, the result of the Company’s response to COVID-19 and measures taken to ensure sufficient short-term liquidity.

Cash and cash equivalent balances increased ~~approximately $400,000 to $5.8~~$2.6 million ~~as of August 31, 2019 compared to $5.4~~from $4.8 million as of February ~~28, 2019,~~29, 2020 to $7.4 million as of May 31, 2020, primarily as a result of ~~cash flow generated by operating activities exceeding cash flow used by financing activities, including repayment~~the use of ~~debt~~the line of credit and ~~payment~~receipt of ~~dividends.~~loans under the Paycheck Protection Program, as described below. Our current ratio was ~~2.9~~1.5 to 1 at ~~August~~May 31, ~~2019~~2020 compared to ~~3.0~~2.4 to 1 at February ~~28, 2019.~~29, 2020. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.

During the ~~six~~three months ended ~~August~~May 31, ~~2019, we had net income of $1,629,697. Operating~~2020, operating activities ~~provided~~used cash of ~~$2,902,679, with~~$1,598,042, primarily the ~~principal adjustment to reconcile~~result of operating results, the ~~net income to net cash provided by operating activities being~~provision for loss on accounts and notes receivable of $1,468,815, asset impairment and store closure losses of $544,060, depreciation and amortization of ~~$750,486~~$343,115, an increase in accounts payble of $680,748 and ~~the~~ expense ~~recorded for stock~~related to stock-based compensation of ~~$386,670.~~$143,718. During the ~~comparable 2018 period, we had net income of $1,327,759, and~~three months ended May 31, 2019, operating activities provided cash of ~~$1,388,429. The principal adjustment to reconcile~~$1,828,109, primarily the ~~net income to net cash provided by~~result of operating ~~activities was~~results, depreciation and amortization of ~~$872,454~~$377,654, a decrease in inventories of $344,058 and ~~the increase in inventory~~expense related to stock-based compensation of ~~$1,579,686.~~ $231,254.

~~During~~For the ~~six~~three months ended ~~August~~May 31, ~~2019,~~2020, investing activities used cash of ~~$406,376,~~$46,127, primarily due to the purchases of property and equipment and intangible assets of ~~$480,984.~~$63,952. In comparison, investing activities used cash of ~~$200,537~~$254,836 during the ~~six~~three months ended ~~August~~May 31, ~~2018~~2019, primarily due to the purchase of property and equipment of ~~$242,432.~~$283,548.

Financing activities provided cash of $4,236,021 for the three months ended May 31, 2020, primarily as a as a result of the use of the line of credit and receipt of loans under the Paycheck Protection Program, as described below. In comparison, financing activitied used cash of ~~$2,127,121 for~~$1,061,726 during the ~~six~~three months ended ~~August~~May 31, 2019, primarily due to dividend payments and ~~used cash of $2,087,641~~payments on debt during the ~~prior year period. The Company’s financing activities consist primarily of payments on long-term debt and declared dividends.~~three months ended May 31, 2019.

~~We have~~Revolving Credit Line

The Company has a $5.0 million ~~($5.0 million available as of August 31, 2019)~~credit line for general corporate and working capital purposes. On March 16, 2020, as a precautionary measure in light of the COVID-19 pandemic and the related economic impacts, the Company drew the maximum amount available on the credit line in an amount equal to $3.4 million (the full amount of $5.0 million under the credit ~~collateralized~~line, subject to the borrowing base of 50% of eligible accounts receivable plus 50% of eligible inventories). The credit line is secured by substantially all of ~~our~~the Company’s assets, ~~with the exception of our~~except retail store assets. Interest on borrowings is at LIBOR plus 2.25% (2.4% at May 31, 2020). Additionally, the line of credit is subject to various financial ratio and leverage covenants. AsAt May 31, 2020, the Company was not compliant with a covenant of ~~August 31, 2019, we were in compliance with all such covenants. The~~the line of credit ~~was renewed in September 2019~~that requires the Company to have $1.5 million of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the trailing twelve months ended May 31, 2020. As a result of COVID-19, the Company failed to meet the amount of EBITDA required by this covenant. On June 26, 2020 Wells Fargo Bank, NA (“Wells Fargo”) delivered to the Company a Reservation of Rights Letter (“Bank Letter”). The Bank Letter reserved all rights available to Wells Fargo under the Credit Agreement dated October 30, 2015 including, but not limited to, the right of Wells Fargo to demand immediate payment of all amounts outstanding under the Credit Agreement. The letter also placed restrictions on the Company’s ability to draw any further funds on the Line of Credit. The Company intends to work with Wells Fargo to amend the associated covenants as the trends related to COVID-19 begin become clear. There is no assurance that Wells Fargo will agree to any proposed amendment. The credit line is subject to renewal ~~again~~ in September ~~2021. As~~2021 and the Company believes it is likely to be renewed on terms similar to the current terms, subject to the Company’s recovery from the impacts of ~~August 31, 2019, no amount was outstanding under this line of credit.~~COVID-19.

Our outstanding long-term debt is comprised of a promissory note used to finance business acquisitions of SWRL (unpaid balance as of August 31, 2019 of $480,000). The promissory note allowed us to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. The promissory note matures on January 15, 2020. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of August 31, 2019, we were in compliance with all such covenants.PPP Loan

On ~~July 15, 2014, we publicly announced~~April 13, 2020 and April 20, 2020, the Company entered into a ~~plan~~Loan Agreements and Promissory Notes (collectively, the “SBA Loans”) with 1st SOURCE BANK pursuant to ~~repurchase up to $3.0 million of our common stock in~~ the ~~open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, we announced a plan to purchase up to an additional $2,058,000 of our common stock~~Paycheck Protection Program (the “PPP”) under the ~~repurchase plan,~~recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received total proceeds of $1.5 million from the SBA Loans. The SBA Loans are scheduled to mature on ~~May 21, 2015, we announced~~April 14 and April 20, 2022 and have a ~~further increase~~1.00% interest rate and are subject to the ~~repurchase plan~~terms and conditions applicable to loans administered by ~~authorizing~~ the ~~purchase of up to an additional $2,090,000 of our common stock~~U.S. Small Business Administration under the repurchase plan. We did not repurchase any shares during the three and six months ended August 31, 2019. As of August 31, 2019, approximately $638,000 remains available under the repurchase plan for further stock repurchases.

~~We believe cash flows generated~~CARES Act. The SBA Loan may be prepaid by ~~operating activities and available financing will be sufficient to fund our operations for at least the next twelve months. If necessary,~~ the Company ~~has an available bank line of credit~~at any time prior to ~~help meet these requirements.~~maturity with no prepayment penalties.

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The SBA Loans contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the SBA Loans may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by the Company during the eight-week period after the loan origination for certain purposes, including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that, among other things, at least 75% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at certain level. In accordance with the requirements of the CARES Act and the PPP, the Company intends to use the proceeds from the SBA Loans primarily for payroll costs. No assurance can be given that the Company will be granted forgiveness of the SBA Loans in whole or in part.

Off-Balance Sheet Arrangements

~~As of August 31, 2019, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.~~

Purchase obligations: As of ~~August~~May 31, ~~2019,~~2020, we had purchase obligations of approximately ~~$714,000.~~$227,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.

Impact of Inflation

Inflationary factors such as increases in the costs of ingredients and labor directly affect our operations. Most of our leases provide for cost-of-living adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease costs for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.

Depreciation expense is based on the historical cost to us of ~~our~~ fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.

Seasonality

We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of our products have occurred during key holidays and the summer vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.

Item 3.

Quantitative and Qualitative Disclosures ~~About~~about Market Risk

We do not engage in commodity futures trading or hedging activities and do not enter into derivative financial instrument transactions for trading or other speculative purposes. We also do not engage in transactions in foreign currencies or in interest rate swap transactions that could expose us to market risk. However,As a smaller reporting company, we are ~~exposed~~not required to ~~some commodity price and interest rate risks.~~provide the information required by this Item.

We frequently enter into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit us to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall and we are unable to renegotiate the terms of the contract. As of August 31, 2019, based on future contractual obligations for ingredients, we estimate that a 10.0% change in the prices of contracted ingredients would result in a $71,000 favorable or unfavorable price benefit or cost, respectively, resulting from our contracts.

We have a $5 million bank line of credit that bears interest at a variable rate. As of August 31, 2019, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this line of credit.

We also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually that was used to finance the previous acquisitions by SWRL. As of August 31, 2019, $480,445 was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that material information relating to us is made known to the officers who certify as to our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of ~~August~~May 31, ~~2019.~~2020.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended ~~August~~May 31, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is party to various legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Item 1A.

Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February ~~28, 2019.~~29, 2020. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February ~~28, 2019.~~29, 2020.

Table of Contents

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

~~None.~~None

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not ~~Applicable.~~applicable.

Item 5.

Other Information

None.

Table of Contents

Item 6.

Exhibits

3.1

~~3.1~~

Amended and Restated Certificate of Incorporation of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015).


3.2	Certificate of Designations of Series A Junior Participating Preferred Stock, ~~par value~~Par Value $0.001 ~~per share,~~Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015).


3.3	Second Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit ~~3.3~~3.1 to the Current Report on Form 8-K filed on December 6, 2019).

10.1	ECommerce Licensing Agreement, effective March 16, 2020, by and between Rocky Mountain Chocolate Factory, Inc. and Edible Arrangements, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March ~~2, 2015)~~23, 2020).

	10.1*
10.2	~~Revolving Line of Credit Note, dated September 30, 2019,~~Indemnification Letter Agreement, effective March 16, 2020, by and between Rocky Mountain Chocolate Factory, Inc. and ~~Wells Fargo Bank, National Association.~~Edible Arrangements, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 23, 2020).

	31.1*
10.3	Loan Agreement, dated April 13, 2020, between Rocky Mountain Chocolate Factory, Inc. and 1st SOURCE BANK (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on April 16, 2020).

10.4	Promissory Note Agreement, dated April 13, 2020, between Rocky Mountain Chocolate Factory, Inc. and 1st SOURCE BANK (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on April 16, 2020).

31.1*	Certification Filed Pursuant To Section 302 ofOf The Sarbanes-Oxley Act of 2002.


32.1**	Certification Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002.


101.INS	*XBRL Instance Document.


101.SCH	*XBRL Taxonomy Extension Schema Document.


101.CAL	*XBRL Taxonomy Extension Calculation Linkbase Document.


101.DEF	*XBRL Taxonomy Extension Definition Linkbase Document.


101.LAB	*XBRL Taxonomy Extension Label Linkbase Document.


101.PRE	*XBRL Taxonomy Extension Presentation Linkbase Document.

____________________________

* Filed herewith.

** Furnished herewith.

Table of Contents

~~Signatures~~Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

(Registrant)

Date: ~~October 11, 2019~~July 20, 2020

/s/ Bryan J. Merryman

Bryan J. Merryman, Chief Executive Officer,

Chief Financial Officer, Treasurer and ~~Chairman of the Board of Directors~~

Director

s in thousands)

2019

2018

Change

2020

2019

Change

Cost of sales - factory

3,435.3

3,575.4

(140.1

)

(3.9

2,790.6

4,326.5

(1,535.9

)

(35.5

Cost of sales - retail

303.1

308.5

(5.4

)

(1.8

92.6

288.2

(195.6

)

(67.9

Franchise costs

441.6

582.8

(141.2

)

(24.2

421.2

483.0

(61.8

)

(12.8

Sales and marketing

434.8

565.2

(130.4

)

(23.1

474.1

556.7

(82.6

)

(14.8

General and administrative

830.5

813.4

17.1

2.1

3,179.5

1,144.7

2,034.8

177.8

Retail operating

469.3

498.9

(29.6

)

(5.9

319.2

448.9

(129.7

)

(28.9

Total

5,914.6

6,344.2

(429.6

)

(6.8

7,277.2

7,248.0

29.2

0.4

Table of Contents

Gross Margin

Three Months Ended

August 31,
$
%

($'s in thousands)

2019

2018

Change

Change

Factory gross margin
$ 1,047.1 $ 1,206.7 $ (159.6 ) (13.2 )%
Retail gross margin
598.6 645.8 (47.2 ) (7.3 )%
Total
$ 1,645.7 $ 1,852.5 $ (206.8 ) (11.2 )%

	Three Months Ended
	May 31,					$			%
($'s in thousands)	2020			2019		Change			Change

Factory gross margin	$	(656.0	)	$	1,279.5	$	(1,935.5	)		(151.3	)%
Retail gross margin		95.0			566.4		(471.4	)		(83.2	)%
Total	$	(561.0	)	$	1,845.9	$	(2,406.9	)		(130.4	)%

Three Months Ended

August 31,

%

%

2019

2018

Change

Change

(Percent)

Factory gross margin
23.4 % 25.2 % (1.9 )% (7.4 )%
Retail gross margin
66.4 % 67.7 % (1.3 )% (1.9 )%
Total
30.6 % 32.3 % (1.7 )% (5.4 )%

	Three Months Ended
	May 31,						%			%
	2020			2019			Change			Change
(Percent)
Factory gross margin		-30.7	%		22.8	%		(53.5	)%		(234.6	)%
Retail gross margin		50.6	%		66.3	%		(15.7	)%		(23.7	)%
Total		-24.2	%		28.6	%		(52.8	)%		(184.6	)%

Adjusted Gross Margin

Three Months Ended

August 31,
$
%

($'s in thousands)

2019

2018

Change

Change

Factory gross margin
$ 1,047.1 $ 1,206.7 $ (159.6 ) (13.2 )%
Plus: depreciation and amortization
147.4 138.2 9.2 6.7 %
Factory adjusted gross margin
1,194.5 1,344.9 (150.4 ) (11.2 )%
Retail gross margin
598.6 645.8 (47.2 ) (7.3 )%
Total Adjusted Gross Margin
$ 1,793.1 $ 1,990.7 $ (197.6 ) (9.9 )%

Factory adjusted gross margin
26.6 % 28.1 % (1.5 )% (5.2 )%
Retail gross margin
66.4 % 67.7 % (1.3 )% (1.9 )%
Total Adjusted Gross Margin
33.3 % 34.7 % (1.4 )% (4.0 )%

	Three Months Ended
	May 31,						$			%
($'s in thousands)	2020			2019			Change			Change

Factory gross margin	$	(656.0	)	$	1,279.5		$	(1,935.5	)		(151.3	)%
Plus: depreciation and amortization		157.5			145.7			11.8			8.1	%
Factory adjusted gross margin		(498.5	)		1,425.2			(1,923.7	)		(135.0	)%
Retail gross margin		95.0			566.4			(471.4	)		(83.2	)%
Total Adjusted Gross Margin	$	(403.5	)	$	1,991.6		$	(2,395.1	)		(120.3	)%

Factory adjusted gross margin		-23.4	%		25.4	%		(48.8	)%		(192.1	)%
Retail gross margin		50.6	%		66.3	%		(15.7	)%		(23.7	)%
Total Adjusted Gross Margin		-17.4	%		30.8	%		(48.2	)%		(156.5	)%

~~Table of Contents~~

~~Cost of Sales~~ ~~and Gross Margin~~

~~Franchise Costs~~

~~Sales and Marketing~~

~~General and Administrative~~

~~Retail Operating Expenses~~

~~Depreciation and Amortization~~

~~Costs Associated with Company-Owned Store Closures~~

~~Table of Contents~~

~~Other Income~~ ~~(Expense)~~

~~Income Tax Expense~~

~~Our effective income tax rate for the three months ended August 31, 2019 was 26.4%, compared to 26.8% for the three months ended August 31, 2018.~~

~~Six Months Ended August 31, 2019 Compared to the Six Months Ended August 31, 2018~~

~~Results Summary~~

~~Revenues~~

~~Factory Sales~~

~~Retail Sales~~

~~Royalties, Marketing Fees and Franchise Fees~~

~~Table of Contents~~

~~Costs and Expenses~~

~~Cost of Sales~~

~~Gross Margin~~

Six Months Ended

August 31,

%

%

2019

2018

Change

Change

Factory gross margin
23.1 % 24.1 % (1.1 )% (4.4 )%
Retail gross margin
66.3 % 64.4 % 1.9 % 2.9 %
Total
29.5 % 30.6 % (1.1 )% (3.7 )%

~~Adjusted Gross Margin~~

~~Table of Contents~~

Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider itthem in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.

Cost of Salesand Gross Margin

Table of Contents

Franchise Costs

Sales and Marketing

General and Administrative

Retail Operating Expenses

Depreciation and Amortization

~~Table of Contents~~

~~Costs Associated with Company-Owned Store Closures~~

Other Income (Expense)

Income Tax Expense

Table of Contents

Liquidity and Capital Resources

~~We have~~Revolving Credit Line

Table of Contents

Off-Balance Sheet Arrangements

~~As of August 31, 2019, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.~~

Impact of Inflation

Seasonality

Item 3.

Quantitative and Qualitative Disclosures ~~About~~about Market Risk

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Changes in Internal Control over Financial Reporting

Table of Contents

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Table of Contents

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

~~None.~~None

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not ~~Applicable.~~applicable.

Item 5.

Other Information

None.

Table of Contents

Item 6.

Exhibits

3.1

~~3.1~~


3.2	Certificate of Designations of Series A Junior Participating Preferred Stock, ~~par value~~Par Value $0.001 ~~per share,~~Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015).


3.3	Second Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit ~~3.3~~3.1 to the Current Report on Form 8-K filed on December 6, 2019).

10.1	ECommerce Licensing Agreement, effective March 16, 2020, by and between Rocky Mountain Chocolate Factory, Inc. and Edible Arrangements, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March ~~2, 2015)~~23, 2020).

	10.1*
10.2	~~Revolving Line of Credit Note, dated September 30, 2019,~~Indemnification Letter Agreement, effective March 16, 2020, by and between Rocky Mountain Chocolate Factory, Inc. and ~~Wells Fargo Bank, National Association.~~Edible Arrangements, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 23, 2020).

	31.1*
10.3	Loan Agreement, dated April 13, 2020, between Rocky Mountain Chocolate Factory, Inc. and 1st SOURCE BANK (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on April 16, 2020).

10.4	Promissory Note Agreement, dated April 13, 2020, between Rocky Mountain Chocolate Factory, Inc. and 1st SOURCE BANK (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on April 16, 2020).

31.1*	Certification Filed Pursuant To Section 302 ofOf The Sarbanes-Oxley Act of 2002.


32.1**	Certification Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002.


101.INS	*XBRL Instance Document.


101.SCH	*XBRL Taxonomy Extension Schema Document.


101.CAL	*XBRL Taxonomy Extension Calculation Linkbase Document.


101.DEF	*XBRL Taxonomy Extension Definition Linkbase Document.


101.LAB	*XBRL Taxonomy Extension Label Linkbase Document.


101.PRE	*XBRL Taxonomy Extension Presentation Linkbase Document.

____________________________

* Filed herewith.

** Furnished herewith.

Table of Contents

~~Signatures~~Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

(Registrant)

Date: ~~October 11, 2019~~July 20, 2020

/s/ Bryan J. Merryman

Bryan J. Merryman, Chief Executive Officer,

Chief Financial Officer, Treasurer and ~~Chairman of the Board of Directors~~

Director

s in thousands)

2019

2018

Change

2020

2019

Change

Factory gross margin

1,047.1

1,206.7

(159.6

)

(13.2

(656.0

)

1,279.5

(1,935.5

)

(151.3

Retail gross margin

598.6

645.8

(47.2

)

(7.3

95.0

566.4

(471.4

)

(83.2

Total

1,645.7

1,852.5

(206.8

)

(11.2

(561.0

)

1,845.9

(2,406.9

)

(130.4

	Three Months Ended
	May 31,						%			%
	2020			2019			Change			Change
(Percent)
Factory gross margin		-30.7	%		22.8	%		(53.5	)%		(234.6	)%
Retail gross margin		50.6	%		66.3	%		(15.7	)%		(23.7	)%
Total		-24.2	%		28.6	%		(52.8	)%		(184.6	)%

Adjusted Gross Margin

	Three Months Ended
	May 31,						$			%
($'s in thousands)	2020			2019			Change			Change

Factory gross margin	$	(656.0	)	$	1,279.5		$	(1,935.5	)		(151.3	)%
Plus: depreciation and amortization		157.5			145.7			11.8			8.1	%
Factory adjusted gross margin		(498.5	)		1,425.2			(1,923.7	)		(135.0	)%
Retail gross margin		95.0			566.4			(471.4	)		(83.2	)%
Total Adjusted Gross Margin	$	(403.5	)	$	1,991.6		$	(2,395.1	)		(120.3	)%

Factory adjusted gross margin		-23.4	%		25.4	%		(48.8	)%		(192.1	)%
Retail gross margin		50.6	%		66.3	%		(15.7	)%		(23.7	)%
Total Adjusted Gross Margin		-17.4	%		30.8	%		(48.2	)%		(156.5	)%

~~Table of Contents~~

~~Cost of Sales~~ ~~and Gross Margin~~

~~Franchise Costs~~

~~Sales and Marketing~~

~~General and Administrative~~

~~Retail Operating Expenses~~

~~Depreciation and Amortization~~

~~Costs Associated with Company-Owned Store Closures~~

~~Table of Contents~~

~~Other Income~~ ~~(Expense)~~

~~Income Tax Expense~~

~~Our effective income tax rate for the three months ended August 31, 2019 was 26.4%, compared to 26.8% for the three months ended August 31, 2018.~~

~~Six Months Ended August 31, 2019 Compared to the Six Months Ended August 31, 2018~~

~~Results Summary~~

~~Revenues~~

~~Factory Sales~~

~~Retail Sales~~

~~Royalties, Marketing Fees and Franchise Fees~~

~~Table of Contents~~

~~Costs and Expenses~~

~~Cost of Sales~~

~~Gross Margin~~

Six Months Ended

August 31,

%

%

2019

2018

Change

Change

Factory gross margin
23.1 % 24.1 % (1.1 )% (4.4 )%
Retail gross margin
66.3 % 64.4 % 1.9 % 2.9 %
Total
29.5 % 30.6 % (1.1 )% (3.7 )%

~~Adjusted Gross Margin~~

~~Table of Contents~~

Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin plus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider itthem in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.

Cost of Salesand Gross Margin

Table of Contents

Franchise Costs

Sales and Marketing

General and Administrative

Retail Operating Expenses

Depreciation and Amortization

~~Table of Contents~~

~~Costs Associated with Company-Owned Store Closures~~

Other Income (Expense)

Income Tax Expense

Table of Contents

Liquidity and Capital Resources

~~We have~~Revolving Credit Line

Table of Contents

Off-Balance Sheet Arrangements

~~As of August 31, 2019, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.~~

Impact of Inflation

Seasonality

Item 3.

Quantitative and Qualitative Disclosures ~~About~~about Market Risk

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Changes in Internal Control over Financial Reporting

Table of Contents

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Table of Contents

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

~~None.~~None

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not ~~Applicable.~~applicable.

Item 5.

Other Information

None.

Table of Contents

Item 6.

Exhibits

3.1

~~3.1~~


3.2	Certificate of Designations of Series A Junior Participating Preferred Stock, ~~par value~~Par Value $0.001 ~~per share,~~Per Share, of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on March 2, 2015).


3.3	Second Amended and Restated Bylaws of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (incorporated by reference to Exhibit ~~3.3~~3.1 to the Current Report on Form 8-K filed on December 6, 2019).

10.1	ECommerce Licensing Agreement, effective March 16, 2020, by and between Rocky Mountain Chocolate Factory, Inc. and Edible Arrangements, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March ~~2, 2015)~~23, 2020).

	10.1*
10.2	~~Revolving Line of Credit Note, dated September 30, 2019,~~Indemnification Letter Agreement, effective March 16, 2020, by and between Rocky Mountain Chocolate Factory, Inc. and ~~Wells Fargo Bank, National Association.~~Edible Arrangements, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 23, 2020).

	31.1*
10.3	Loan Agreement, dated April 13, 2020, between Rocky Mountain Chocolate Factory, Inc. and 1st SOURCE BANK (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on April 16, 2020).

10.4	Promissory Note Agreement, dated April 13, 2020, between Rocky Mountain Chocolate Factory, Inc. and 1st SOURCE BANK (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on April 16, 2020).

31.1*	Certification Filed Pursuant To Section 302 ofOf The Sarbanes-Oxley Act of 2002.


32.1**	Certification Furnished Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002.


101.INS	*XBRL Instance Document.


101.SCH	*XBRL Taxonomy Extension Schema Document.


101.CAL	*XBRL Taxonomy Extension Calculation Linkbase Document.


101.DEF	*XBRL Taxonomy Extension Definition Linkbase Document.


101.LAB	*XBRL Taxonomy Extension Label Linkbase Document.


101.PRE	*XBRL Taxonomy Extension Presentation Linkbase Document.